British Sky Broadcasting has agreed to acquire the Virgin Media television subsidiary and its channels while providing a long-term deal for the carriage of certain Sky channels by Virgin Media. Some might question why the cable company would want to sell its channels to a satellite competitor, or indeed why Sky would want to buy them. The mainstream media has focussed on the facts of the deal at face value.
Sky will pay £160 million in cash for the Virgin Media Television channels business, with £105 million up front and the remainder payable subject to regulatory clearance. As a result Sky will gain control of seven channels and eliminate ongoing carriage fees. These include Virgin 1, together with Living, Challenge and Bravo and their extension channels. Sky will not licence the Virgin brand and will rename the channel. Sky will assume responsibility for selling advertising on the channels from 2011.
Virgin Media will distribute the channels on its cable television service, together with Sky channels, including Sky1 and Sky Arts, and for the first time will have the option of carrying any of the Sky basic HD channels, Sky Sports HD 1 and 2, and all the Sky Movies HD channels, for an incremental wholesale fee, as well as red-button interactive sports coverage. Virgin Media will also provide a range of programming from Sky channels through its video-on-demand service and be able to offer selected standard definition programming over the internet.
The cash from the sale will benefit the bottom line at Virgin Media but is almost incidental compared to their combined pay-television revenues and the six billion pounds that the cable company still has in long-term debt.
It is difficult to see which side gets the best end of the deal, which may make it a genuine bargain, but it seems likely that Sky will end up the winner either way.
Virgin Media may be able to carry Sky channels, including sport and movies in high-definition, but they will still be branded Sky, who will retain the majority of the revenue from the increased distribution.
Sky gains the grab bag of Virgin Media channels, of which Living is the most successful, with a mixture of acquired American imports, like Grey’s Anatomy and America’s Top Model, and highly original indigenous commissions, like Britain’s Top Model and the paranormally popular Most Haunted. Last year the Virgin Media channels accounted for £140 million in gross revenues, of which £30 million came carriage fees from Sky.
Sky may be paying a premium for these channels but it is securing distribution for its own on cable, while Virgin Media gets more certainty over carriage costs.
Jeremy Darroch, the Sky chief executive, described it as “an attractive investment opportunity which complements our existing content business and delivers strategic and financial benefits”. He said he was pleased to have “been able to ensure wide distribution of our channels to a growing pay TV universe” through commercial negotiation.
The reality is that regulation could ultimately require it to provide wholesale access in any case. Sky benefits by extending the exposure to its brand on cable and expanding the audience available to advertisers. Investments by Sky tend to be more strategic than speculative. In this case, Sky is basically buying out channels that compete with its own operation, particularly in terms of imported hit series.
Neil Berkett, the chief executive of Virgin Media, claimed the sale of the channels business “generated substantial value” allowing the company to “focus more closely on our strategy of exploiting Virgin Media’s super-fast connectivity to offer our customers a range of the very best content through a highly versatile next generation entertainment application.”
In effect, Virgin Media recognises that it cannot compete with Sky on exclusive premium programming and needs to concentrate on its delivery infrastructure and video-on-demand capability for differentiation.
Both pay-television providers appear to be burying the hatchet, following long-running channel carriage disputes, in order to focus on the common competition of free-to-air television, over-the-top internet video, and hybrid broadcast and broadband services.
The Virgin 1 channel currently occupies a valuable transmission slot on Freeview digital terrestrial television, not mentioned in the announcement, which could be used for a rebranded Sky channel, either free-to-air or as part of a pay-television proposition.
The former Virgin Media channels are currently played out by Red Bee Media but it seems likely that Sky might bring them in-house, assuming they all continue. With Sky taking over advertising sales for the former Virgin Media channels, the future of the current Interactive Digital Sales operation IDS must be under discussion.
Virgin Media will continue to own half of the UKTV channel operation, the joint venture with BBC Worldwide, for which IDS also sells advertising airtime. The long-term involvement of Virgin Media in the UKTV business must also be in question and further structural re-alignment and consolidation appears inevitable.